Many retirement aged buyers have worked so hard most of their lives to build a retirement nest egg. A primary goal is to accumulate enough funds for an eventual retirement income. Hopefully, it is an income that continues for life. The most common forms of retirement income include social security income, pension income, federal or state retirement plans, and retirement distribution plans. Plans which are typically paid in a monthly distribution include a 401k, IRA, SEP, or Keogh account. When it comes to mortgage income qualification, it is important to understand the 401k and IRA distribution rules.
Understanding 401k and IRA distribution rules within mortgage lending guidelines could go a long way towards income qualification (this is especially true when there is insufficient income and debt to income ratios are too high). However, an IRA or 401k account balance could be turned into a new income stream. Although, mortgage lenders look for specific characteristics to count new retirement distribution income. So, let’s discuss how to count new distribution income.
Potential Issues for Retired Buyers
Sometimes retired buyers have plenty of assets but are short on income. The problem is that traditional mortgage loan programs use the income to calculate debt to income ratios. Not the retirement assets. Therefore, buying a $200,000 or $300,000 home on social security income and maybe a small pension or part-time job alone is difficult. Unless the buyer brings a sizeable down payment. Although, perhaps that is possible from selling a previous home or withdrawing from savings.
What about withdrawing a significant amount from a retirement account to get the debt to income ratios within mortgage guidelines? The problem here is that withdrawing funds from most retirement accounts results in a potential income tax liability. That means filing the next tax return could mean a massive income tax bill, but setting up an income distribution from a retirement account could help the debt to income ratio issue. Even though it is still a potentially taxable event, it should be less than withdrawing a substantial down payment.
Of course, mortgage programs have requirements for everything. Right? When it comes to new retirement income, mortgage loans have 401k or IRA distribution rules. If documented correctly, this is a great solution to buy the home you want and get the payment you wish to have.
401k & IRA Distribution Rules for Mortgages
A retirement asset may be converted to a qualifying income to overcome income qualification issues during retirement years. Even though a buyer has just set up a new income withdrawal, the income may be counted by following a few simple steps.
IRA Distribution Income Requirements
- The borrower must be 59 1/2 or older.
- Sufficient balance for a 3-year continuance of income distribution
- Unrestricted access to an account without penalty
- Started income distribution before the application date
- Received at least one distribution before final underwriting approval
Guidelines may vary among home loan programs, and some lenders require a longer income history, but retirees with sufficient retirement assets (while following guidelines) may have a valuable tool to use towards buying a retirement home.